Crowdfunding is a way to invest your money. In addition to stocks, ETFs and real estate, investing through crowdfunding can be a way to invest your money for financial gain. Crowdfunding has some advantages over other investments,
as you can read here
. Within the crowdfunding category you have also again all kinds of possibilities. In this article, we explain: “How do you choose a crowdfund project?”
This article is part of a paid partnership with Collin Crowdfund. They are paying Elfin to work with us to create content for our community. Our common goal is for women to make an informed assessment of whether crowdfunding is an option for them. Always do your own research well and invest only with a party that feels right for you. Don’t invest with money you can’t afford to lose.
In this article, we will assume that you start investing in crowdfunding with the largest crowdfinance platform in the Netherlands: Collin Crowdfund. There are several crowdfunding parties in the Netherlands, such as
some that we mention in this article.
How do you choose a crowdfund project?
When you start picking out your investments, it is first important to have a clear plan for yourself. How much risk are you willing to take, how much money do you have available and what is the horizon (meaning, how long do you have) of your investments? Once you have this clear, you can move forward and choose investment products based on your risk profile. If you choose to invest (also) in crowdfunding, then within the category you can then also think carefully about the projects you select. Of course, also based on your risk. In this article, we’ll tell you how to pick a crowdfund project and what to consider.
Psst: Need help discovering how investing could possibly work for you and how to determine your risk appetite? Then become an Elfin member and take the Beginning to Invest e-course.
Distribution
There is a proverb for a reason: bet on several horses. Spreading out your investments is important to minimize risk,
read more about it in this article
. Similarly, within the crowdfunding category, you can spread further. By spreading your investments across multiple projects, you not only spread your investment but also your risk. Investing through crowdfinance comes with risks just like any other form of investment.
For example, would you as an investor have invested in all crowdfund projects at Collin Crowdfund in the year 2020, you would have achieved a net return of 5.84% in that year. You had invested 222 times in that case with only 10 investments being in arrears that resulted in a provision or write-off. So the return of 5.84% is already minus provisions and minus write-downs.
You then achieved a net return of 5.84%, even though you also made ten investments that were not as successful. Do you want a relatively stable and fixed return? Then investing a relatively small amount of money in all (as many as possible) investment opportunities (projects) is a good strategy.
Selective with dispersion
Okay, that spread is important, but you still need some capital to invest in all the projects. Namely, the minimum investment amount is €100 for Collin Direct* projects and €500 for projects above €250,000.
*CollinDirect goes through a faster review process and covers relatively smaller financings.
We fully understand that not everyone has the ability to invest in all projects. Or that you are a start-up investor, for example, and also want to build a small investment portfolio with stocks and ETFs. If you do not want to invest in all crowdfund projects at Collin Crowdfund, but rather a select few, you will have to be selective. For that, proper assessment of the projects is important.
Collin Credit Score (CCS).
One way to assess a crowdfunding project is the Collin Credit Score, or CCS. The CCS is Collin’s risk rating. You can read the risk of a particular project based on this score. This score ranges from “very good” to “insufficient,” but only projects rated very good, good, more than sufficient and sufficient appear on the platform. Projects rated moderate or insufficient will be rejected by Collin.
Through the Collin Credit Score you can easily see what the risks are and you know that with a score of ‘sufficient’ you need to read the presentation of the project a little more carefully than with a score of ‘very good’. This score also directly affects the interest you receive on your investment. The more risk, the higher the interest rate and the lower the risk, the lower the interest rate.
Branches
In addition to an estimate based on the CCS, distribution among different industries is also important. You never know what the world will be like in three years. Suppose you like to invest in hospitality businesses, then in the event of a new pandemic and lockdown, you are more at risk.
Had you invested in web shops and specialty stores at that time? Then, at that point, you would have also invested in companies that suffer less to no lockdown. So when investing selectively, also try to spread out well across industries.
Selectively
How do you choose a crowdfund project? You can also choose to invest very selectively only in the projects that interest you and that you really feel good about.
With this type of investment, it is very important that you read the pitches (presentations of the project/company) carefully(which of course is recommended with any investment). In doing so, you can also check out the company and entrepreneurs and go over the collateral thoroughly.
In this way, it is possible to achieve returns of 6%, 7% or perhaps even higher. However, again(here it comes again) it is recommended that a certain spread be applied. By spreading out across multiple investments, you also spread the risks. The impact of any write-off due to possible bankruptcy is then many times smaller at that time.
So there are different investment strategies in crowdfinance. Each strategy has its advantages and disadvantages. It’s up to you to determine which strategy works for you. We cannot, should not and will not give advice on that. But one thing is for sure: do you find crowdfinance interesting and don’t want to read through all the presentations every time, but do want to invest? Then go for as high a spread as possible to limit your risks.
